Getting a car can be a dizzying and stressful process – car loans doubly so. You might think that in order to understand interest rates you need a degree in financing – but it need not be so. Here, I’m going to give you the tools on the in and outs of car loan interest rates.

What is Interest and Why is it on my Car Loan?

Interest is what you are paying above the cost of the principal. This extra cost is used as coverage for lenders on those unable to pay the loan off. If you are a high-risk individual, the lender will charge you a higher interest rate for your car loan.

How Long will I be Paying the Car Loan off?

You should expect to pay your car loan off monthly in around 60 installments – or 5 years. The longer the loan, the less you’ll have to pay back every month, but the more you end up paying in interest. Remember, you don’t own the car until you completely pay off your loan.

Your Credit Score is a Big Determinant of your Interest Rate.

Lenders use your credit score to decide your risk level – the higher your score the lower your interest rates. U.S. News and World Reports says that if you have a low credit score you can expect to put down a bigger down payment.

What is the Credit Score that I want for the Lowest Rates?

Credit scores are anywhere from 300 to 850. Creditors define the best rates in the super prime category – which is anything above 780. Typically the average score for a new car is 714, while used car loans have a credit score around 655.

How do I find out my Credit Score?

There are many credit reports online, but the only accurate credit scores are given by FICO – what they use exactly is a closely guarded secret. However, things like payment history, debt burden, and types of credit are all known to influence your credit score.

How do I find out my Credit History?

Use AnnualCreditReport.com  – this is the only free credit agency authorized by federal law. It uses the 3 biggest organizations – Equifax, Experian, and TransUnion. You can get a free copy of your credit report once every 12 months.

How do I get my Credit Score Higher?

Work on paying off all of your outstanding debts first – often you can make a deal with creditors to pay off less than you would expect. After this, make sure you pay all your bills on time for at least 6 months. Try avoid putting anything on credit unless you need to.

What if I don’t have any Credit?

You need not despair! If you are trying to take out a car loan with no history you can get a co-signer – ideally someone with a high credit score. The person who co-signs is putting their reputation on the line, which is telling the lenders they can trust you to pay off the loan on time.

What Else Determines my Interest Rates?

The lending organizations themselves – banks, credit unions, and car manufacturers – can each give different rates depending on a plethora of circumstances. Getting a loan through an institution you already have done business with typically results in a lower rate.

What are the Car Manufacturer’s Typical Rates?

This can vary dramatically depending on the manufacturer. Wallethub’s Q3 2017 Auto Finance Report puts interest rates from 0.0% to 4.9%. You should look to see if any dealer’s in your area offer incentive programs – these have lower interest for special requirements.

What about Car Loans through my Bank or Credit Union?

If you can, I would recommend trying to get a car loan through your bank or credit union. Not only is this convenient, but banks are usually willing to negotiate lower interest rates on your behalf.

Use Lender Competition to your Advantage.
In order to avoid harming your credit score, you are going to want to apply to as many lenders as possible in a short amount of time so you can compare. I suggest bringing a pre-approved loan to the car dealership to see if they can beat the rate.

Are you getting a New or Used Car?
The used car may be cheaper, but you might spend less on a new car over the same loan period. Lenders offer lower interest rates on new cars because they are much less risky – used cars, on the other hand, don’t have warranties and are prone to repairs.

Don’t Exaggerate or Deceive Potential Lenders!

Lying on a loan application can cause it to be rescinded. If you are going to use your new car for business – like Uber or Lyft – make sure to tell the lender. Doing so will make you considered for a business loan, which is subject to different standards.

So, what Interest Rate can I Expect?

The Proctor Dealerships puts interest rates given on car loans typically around 4.0%, but can vary anywhere from 0.0% all the way to 16.0%. Having a strong credit score and taking advantage of all the deals offered can lock in the lowest possible rate.